Computerised trading systems which match bids and offers, orders, or other specified requests of parties, in order to make a trade are widely disclosed in the prior art. Some systems provide a user with information about existing bids and offers and enable the user to make a trade, while other systems automatically form a trade from a bid and offer when they are found to match (e.g. when a market price moves such that the bid and offer then match). An example of a system for automatically matching bids and offers for financial instruments according to the prior art has a central server that holds records of all pending bids and offers.
Such computerised trading systems have generally been used to implement single-instrument transactions, such as an interest rate swap. However, other trades exist that link two or more types of instruments. For example, a “spread over” trade hedges an interest rate swap against a future security by trading both instruments simultaneously.
An excellent example of a spread over trade can be found in the US dollar swap market. In the context of a 5 year USD swap, the hedge security used is normally the US Treasury 5 Year note. In a generic sense, a given swap could be hedged against any particular security but, over time, a convention has arisen that the hedge will always be that particular US Treasury note. The reason for this is that this particular security meets the criteria required for a good hedge of the underlying swap trade. Primarily these criteria are:    Yield Correlation—that is, a change in the hedge yield is tightly correlated to a change in the swap yield;    Highly Liquid—the hedge instrument should be able to be traded easily and in large volumes; and    Tight Spread—closely related to the liquidity, the hedge instrument needs to have a tight bid/offer spread to minimise the overall cost of the transaction.
When a security meets these criteria, it will make a good hedge for another instrument. This is the case in the US Treasury market.
To assess whether or not a spread over trade is attractive, the yields from the swap and the security must be determined to allow their difference (the spread over yield) to be calculated. It has become the convention in the USD swap market to value spread over trades as simply the difference in yield between the higher swap trade and the lower treasury note trade, or in other words the spread over the treasury note yield. For a bid spread over order to match an offer spread over order, the spread over yields must match.
Determining the yield from a swap is straightforward given the required interest rates. Further, there is a standard price to yield conversion function in the US Treasury market that means there is universal agreement on the yield for a given trade in the Treasury note.
As a result, a trader examining a spread over instrument will see a series of orders at a variety of “prices” where those prices represent a number of basis points difference between the swap trade yield and the Treasury note yield, where a basis point represents one hundredth of a percent.
In Europe, a simple Treasury bond has not presented itself as a good hedge for swap trades. Instead, the Bund Future has become the hedge of choice for European swaps, therefore we focus on this example although the system implements a solution that is generic.
Implementation of a computerised trading system to conduct European spread over trades has been frustrated by the lack of a single accepted price to yield conversion methodology for the Bund Future. Three common methods are “Swap Zero Coupon”, “Cheapest to Deliver Forward” and “Cheapest to Deliver”. The details of each of these methodologies are publicly available; suffice it to say here that each methodology provides different yields for the same price of the future. However, these are only three of the most common methods and, in addition, participants often arrive at different yields even when using the same method, due to different pricing inputs.
For a computerised trading system to match automatically European spread over trades, it must compare the spread over yields of submitted orders. This requires a standard metric for calculating the security yield to allow determination of a standardized spread over yield else comparisons are meaningless.
In the interests of clarity, the phrase “futures cross” will be used to indicate the equivalent of a USD spread over trade in the European markets. Thus, it is an object of the invention to realise a computerised trading system that automatically matches futures cross orders while allowing flexibility in how any particular participant chooses to determine the yield for the security instrument and hence the spread over yield for the futures cross.
It is convenient for the prices that are used in order to achieve “business level” goals to be as stable as possible. By referring to the complex spread over trade as a spread over the underlying bond, the price volatility of the bond is eliminated from the price volatility of the Spread over security, thus making the price more stable. The present invention brings the spread over functionality into the European markets for futures cross. As a result, it is useful to use the spread over nomenclature in the futures cross market.
It is also convention to talk about many interest rate products in terms of yield differentials over some more basic underlying, instrument (known as a credit spread, and this convention is something with which the participants in the market are familiar).
Finally, given that the futures cross product has an intrinsic usefulness, there must be a way to enable a participant to examine the product as a whole and rank the orders that exist within the market to select the best one against which to match. The spread over the futures yield is such a way of assigning a price to the futures cross order as a whole.
In the current, voice-brokered environment, traders will provide their price for a futures cross order in terms of two metrics: (1) the price of the futures trade and (2) the yield of the swap. That is, the price of a futures cross order is rarely given in terms of a spread over the underlying yield of the future, in the current voice brokered world. Whilst it is true that brokers might convert this to a spread over price for their own reference, they will only have a “rough” idea of the extent to which the spread over for a given futures cross will match the specific futures price and swap yield of another futures cross order. This is particularly true when one or other of the two orders has to be moved from its original price points in order to match with another order. Traditionally, it is by returning to the client with a specific counterparty's price and yield combination that a broker can determine if a deal will be done.
This “returning” to the customer whose order is being hit is something to be avoided in an automatic matching system since it would mean that the matching engine cannot execute matches as they are found, for example when a movement in market prices results in an offer and bid matching. The solution is to allow a model to be stored internally to allow the matching engine to make the adjustments internally and to recognise the prices at which deals can be done without having to return to the traders for confirmation. The matching engine may be implemented to search for a price that satisfies both parties requirements and allows a deal to be done.
The system is not restricted to executing trades between legal entities however, and can be used to match any willing parties with any counterparty that they see fit, be that a hypothetical construct, individual person, or a logical label standing for anything else.
As well as providing an electronic or computerised trading system implementing the above features, the invention also provides methods of trading according to these features, methods of providing facilities for such trading, and computer readable media carrying computer program code implementing parts or the whole of the system and methods.